TMI Blog2013 (6) TMI 708X X X X Extracts X X X X X X X X Extracts X X X X ..... 1% of the total turnover. Therefore, it fails the filter provided by the Assessing Officer, on the basis of the foreign exchange earnings. Further, the Revenue from BPO is failing over a period of three years. Datamatic Financial Services Ltd. company fails in this filter adopted by the TPO, we direct the TPO to exclude this company from the list of comparables adopted. Maple e-Solutions Ltd. - Since the DRP in assessee’s own case for assessment year 2007-08 also considered and excluded this company, we uphold the assessee’s objection in this regard and direct the Assessing Officer to exclude this company from the comparables adopted. Nucleus Netsoft & GIS(India) Ltd. company cannot be selected as a comparable not only on the reason of failing employee cost filter, but also due to amalgamation during the year, which has changed the business model of the company. Allowance of depreciation - Held that:- Since this issue was already considered and allowed by the CIT(A) in assessment year 2004-05, this can be considered subject to verification of (1) assessee’s contention that it has provided higher depreciation than what is normally required and (2) the working of avera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dered on merits by the Assessing Officer. Therefore, while allowing this ground on the legal principle, for the purpose of verifying and quantifying the deduction, the matter is restored to the file of the Assessing Officer who should examine and consider deduction afresh in accordance with law, after giving due opportunity of hearing to the assessee Re-characterisation of foreign exchange gains as interest income and thereby reducing the same from the profits of the business while computing deduction under S.10A.- Held that:- Since this issue is no longer res integra and since foreign exchange gain is on account of fluctuations of the foreign exchange received for the services rendered by the assessee, this has to be treated as business income and it has to be considered as profits of the business for computing the deduction under S.10A of the Act. The Assessing Officer is directed to treat accordingly Exclusion of communication charges incurred by the assessee as attributable to the delivery of computer software outside India from the total turnover for the purposes of computing deduction under S.10A - Held that:- We agree in principle with alternate contention that data ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Briefly stated, assessee is wholly owned subsidiary of HSBC Holdings Plc (HSBC group) one of the leading banking and financial services organisation in the world. The assessee provides a range of back office services including contact centre and data entry and data processing and related services, together referred to as BPO services, to its group companies/Associated Enterprises (AE) across the globe. The company s service centres are registered as a 100% export oriented units under the STPI scheme. The assessee has also established a branch in UK to facilitate the identification and effective migration of work to India from AEs. The assessee renders services as a captive service provider and remunerated on a full time equivalent/cost budgeted plus mark-up basis ensuring a mark-up on the cost incurred for providing the services to its AEs. 4. The assessee filed return of income for the assessment year 2006-07 on 22.11.2006 disclosing a taxable income of ₹ 4,25,75,994, after claiming deduction under S.10A of the Income-tax Act, in respect of the profits from export of services form the STPI units. The Dy. Commissioner of Income-tax Circle 2(2), Hyderabad, viz. the Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the course of this order. Transfer Pricing Issues (Grounds No.1 to 13) 7. Even though the assessee has raised various objections on the rejection of its Transfer Pricing documentation, rejection of multiple year data, obtaining information under S.133(6), use of additional filters, etc., the arguments are confined to selection of comparables and allowance of depreciation and risk adjustment. In the course of arguments, the learned counsel fairly restricted his arguments to only five of comparables selected by the TPO and one comparable selected by the assessee but rejected by the TPO. We will consider one by one, each of these comparables and objections for deciding the issue. 8. The first objection is with reference to selection of comparable data by the TPO with reference to the following five companies- (a) Vishal Information Technologies Ltd. (b) Goldstone Infratech Ltd. (c) Datamatic Financial Services Ltd.(seg) (d) Maple e-Solutions Ltd. (e) Nucleus Netsoft GIS(India) Ltd. (now known as (Asit C. Mehta Financial Services Ltd.) Vishal Information Technologies Ltd. 9. The assessee s objection with reference to inclusion of this comparab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on record, for assessment year 2008-09. In view of this, we direct the Assessing Officer to exclude this company from the list of comparables. Goldstone Infratech Ltd 10. The assessee s objection for inclusion of this comparable is on the basis of the filter on foreign exchange earnings, diminishing revenue filter and functionality, being run on lease basis. It was submitted that this company was rejected in the case of Stream International Services Pvt. Ltd. V/s. ADIT(International Taxation) by the Mumbai Bench of the Tribunal, vide its order dated 11.1.2013 in ITA No.8997/Mum/2010 for assessment year 2006-07. 10.1. After considering the rival contentions, we are of the opinion that the business model of the above company is different from that of the assessee. In this case, the foreign exchange revenue is less than 1% of the total turnover. Therefore, it fails the filter provided by the Assessing Officer, on the basis of the foreign exchange earnings. Further, the Revenue from BPO is failing over a period of three years. This issue was considered by the coordinate Bench (Mumbai Bench) of the Tribunal in the case of Stream International Services Ltd.(supra) wherei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wn towards Annexure-2 to demonstrate that the Transactions with the Associated Parties within the meaning of section 92A and 92B of the Income-tax Act, 1961H showed one major transaction with Datamatics Limited towards Re-imbursement of expenses at ₹ 99.14 lakh. The learned AR contended that the transactions of Datamatics Financial Services Limited with other AEs amounted to ₹ 14.31 lakh making total of transactions with the AEs at ₹ 1.13 crore. It was submitted that the percentage of transaction with related parties is much more than 25%, being, the filter adopted by the TPO himself and hence the same should be excluded. 12. In the opposition, the learned Departmental Representative contended that the major transaction of ₹ 99.14 lakh of Datamatics Financial Services Limited with Datamatics Limited was towards Reimbursement of expenses . Since the reimbursement of expenses does not include any profit element, the ld. DR urged that the same be excluded. He stated that once this transaction is excluded, the other transaction of ₹ 14.31 lakh are less than 25% of the total transaction with related parties. 13. We do not find any force in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In view of the above, since this company fails in this filter adopted by the TPO, we direct the TPO to exclude this company from the list of comparables adopted. Maple e-Solutions Ltd. 12. The objection of the assessee with reference to this company is with regard to the financials of the company, on the ground of unreliability of data. It was submitted that selection of this company was rejected in the case of CRM Services India Pvt. Ltd in ITA No.468/Del/2009 and also in the case of Stream International Services (supra). Further, the assessee also relied on the DRP order in assessment year 2007-08, with reference to the above company. 12.1. We have considered the rival sub missions. We agree with the objections of the assessee. In the case of Stream International Services P. Ltd. (supra), it is held with reference to this company as under- 18. We are unable to uphold the contention raised by the learned Departmental Representative. It is apparent from two orders passed one by the Delhi Bench and the other by the Hyderabad Bench of the Tribunal that the case of Maple eSolutions Limited has been directed to be excluded from the list of comparables. As t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company. In the course of arguments, the learned counsel for the assessee placed arguments only with reference to one company by name, Gold Stone Technologies Ltd., whose PLI is about 2.82% to submit that this company satisfies all TPO filters. 15.1 We are unable to consider the submissions of the assessee in this behalf, for the reason that this is not a company selected by the assessee/ tax-payer in the TP report, as seen from the list as mentioned in the TP order, vide para 12. This company is nowhere figuring in the list of comparables selected by the assessee. Out of the companies selected by the assessee, the Assessing Officer selected and accepted three comparables and rest of the companies were rejected. Goldstone Technologies is not figuring in that list. May be, it is one of the companies, which was selected by the Assessing Officer on his search and rejected by him because of various other filters utilized. As seen from the order of the TPO, there is neither discussion on Gold stone Technologies nor any mention about the same so as to examine the contentions of the assessee. Therefore, prima facie, we are of the opinion that this comparable cannot be accepted. 15.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reciation to cost of the comparables was only at 7.96%. Therefore, depreciation adjustment to an extent of 2.81% is required to be made. This adjustment was supported by the order of the CIT(A) for assessment year 2003-04 and the assessee placed relevant working in page 232 of the paper-book A ; for guidance. In the course of arguments, since some of the comparables were to be included, assessee placed relevant working as part of paper-book C page 379A, arriving at the average depreciation of comparables at 8.63 thereby restricting the depreciation adjustment to 2.14%. 17.1 After considering the rival submissions, we are of the opinion that since this issue was already considered and allowed by the CIT(A) in assessment year 2004-05, this can be considered subject to verification of (1) assessee s contention that it has provided higher depreciation than what is normally required and (2) the working of average percentage of depreciation of various comparables ultimately selected. As seen from the table placed at page 379A, average was worked out at 8.63% . How this was arrived at could not be verified as many of the comparables have provided higher rate of depreciation than the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Services India Private Ltd. Vs. DCIT, vide its order dated 17.12.2012 in ITA No.8772/Mum/2010 for assessment year 2006-07. This adjustment of 4.5% cannot be considered based on prime lending rate, which cannot be considered as a market risk adopted. However, the assessee is relying on two more cases of the coordinate Benches in the case of Sony India Ltd. (114 ITD 448)-Del, wherein the Tribunal determined the risk adjustment at 20% of the ALP for a risk mitigated distributor. It also relied on the decision of the Delhi Bench in the case of Rolls Royce Plc V/s. DCIT (90 SOT 42), wherein it was determined at 35% of the company s profitability allocated towards marketing activities. Therefore, it was submitted that since assessee does not have any marketing activities, a 35% adjustment is warranted for the difference in risks. It also submits that risk adjustment can also be computed under the Capital Asset Pricing Model(CAPM)/ Sharpe Model for risk adjustments. Since the application of the above decisions and facts herein are to be examined vis- -vis the assessee s business model, we, without giving any direction with reference to the risk adjustment and amount of risk adjustment re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision of the Delhi Bench of the Tribunal in the case of DCIT V/s. Cheil Communications India P. Ltd. (2010 TII 60 ITAT DEL TP) and the coordinate bench decision of the Tribunal in the case of Four Soft Ltd. V/s. DCIT (ITA No.1495/Hyd/2010)(142 TTJ 358). 20. After considering the rival submissions and following the principles laid down in the decisions of the Tribunal cited above, we are of the opinion that reimbursement costs should be excluded as they do not involve any functions to be performed so as to consider it for profitability purposes. In the case of Four Soft Ltd. Supra, Hyderabad Bench of the Tribunal considered this issue and held as under- 15. We have considered the rival submissions and perused the material on record. First, we will take up the issue relating to the adjustments made by the assessing officer in respect of the international transactions with its associated enterprises in the software development services. It is the contention of the assessee that bad debts incurred by the assessee company are in respect of transactions, which are not related to associated enterprises. This contention of the assessee has not been controverted by the Revenue by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ads as under- Based on the facts and in the circumstances of the case and in law, the learned Assessing Officer ( Assessing Officer )/Transfer Pricing Officer ( TPO ) and the Hon ble Dispute Resolution Panel ( DRP )- 14. Erred in not considering the claim made by the Appellant during the assessment proceedings in considering the turnover of the UK branch operations of ₹ 5,84,96,736 as export turnover for the purpose of computing deduction u/s. 10A of the Act by referring to Goetz decision which is not applicable to the facts of the case; 22. As briefly stated above, the assessee had branch at U. K., and it is the submission of the assessee that inadvertently, it did not claim deduction for the income of the U. K Branch under S.10A of the Income-tax Act. The assessee s contention was that the U. K. branch is different from the STPI is incorrect since the assessee has only one business segment i.e. provision of BPO services. Assessee relied on Circular No.694 dated 23.11.1994 to submit that the revenue and profit from on site activity is also eligible for deduction under S.10A and 10B. It also relied on the decision of the Tribunal in the case of DCIT V/s. Inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (310 ITR (AT) 384), wherein it was held that foreign exchange gain on account of fluctuation -qua export business; is eligible for exemption under S.10B. The DRP also agrees with the submission of the assessee, but relief was not provided as the Revenue has not accepted the said decision in principle, and kept the matters alive, and accordingly confirmed the order of the Assessing Officer . 27. Since this issue is no longer res integra and since foreign exchange gain is on account of fluctuations of the foreign exchange received for the services rendered by the assessee, this has to be treated as business income and it has to be considered as profits of the business for computing the deduction under S.10A of the Act. The Assessing Officer is directed to treat accordingly. The ground is considered as allowed. 28. Ground No.16 is with reference to exclusion of communication charges of ₹ 3,29,60,029 incurred by the assessee as attributable to the delivery of computer software outside India from the total turnover for the purposes of computing deduction under S.10A. It was submitted that the assessee provides services in synchronisation with other teams across the globe an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assessee, as the assessee has complied with the provisions of the Act read with Rules for the purposes of T.P., this issue cannot be adjudicated in the absence of any addition being made at present, as the entire issue of TP additions are restored to the file of the Assessing Officer. Moreover, levy of interest under S.234B is consequential in nature and the Assessing Officer is bound to follow the provisions of S.234B. Therefore, there is no need to adjudicate on this issue at present. We direct the Assessing Officer to consider the submissions of the assessee before levying interest under S.234B, if warranted. With these observations, this ground is considered rejected. 31. Ground No.18 is with reference to initiation of penalty proceedings under S.271(1) of the Act, which is little premature. This issue does not require any adjudication at present, as the Assessing Officer has not yet finalized the proceedings and in the present quantum appeal proceedings, some of the issues are restored to the file of the Assessing Officer for fresh adjudication. Therefore, this ground is treated as academic in nature and accordingly rejected. 32. In the result assessee s appeal i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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